Saving for College

Save for your child's college expenses in the context of your total financial plan. As the saying goes, "You can borrow money for college, but you can't borrow for your retirement." Create a college savings plan that considers your overall financial needs and goals.

With the cost of higher education continually rising, it's more important than ever to get an early start saving for a child or a loved one's college education.

Start early. The earlier you begin, the less you will need to save annually to reach your savings goals. With a longer time horizon until the money is needed, you can utilize investment vehicles that may allow for greater returns, but which are too risky due to their potential volatility for shorter time horizons. Seek to understand potential risks associated with your investments and make sure they are appropriate given your child's age, comfort with potential volatility, and how much time you have before you will need to access the funds.

Save regularly. Dollar cost averaging, that is, saving and investing a fixed amount at regular intervals (weekly, monthly), may be an effective way to save for college as it seeks to even out the ebbs and flows of investing at a particular moment and timing the market.

How much should you save? This is a totally personal decision based on the family's philosophy as to who should pay for college. There is no one answer that is right for everyone. Each family needs to consider their individual situation and your financial advisor and CPA can help. However, a general rule of thumb is to save the full cost of four years of college in the year the student was born, which translates into approximately one-third of the cost once your child reaches college age. The second third of the cost might come from your current earnings while your child is in college, and the final third can be borrowed by a combination of parent loans and child loans. Clearly individual family incomes and the cost of various educational institutions vary widely. These are very general rules of thumb that some financial aid officers have recommended.

Save in tax-advantaged college savings vehicles. College Savings Plans allow you to invest significant sums of money that can grow tax-free. You can set up an account for anyone -- your child, grandchild, niece or nephew -- even yourself. These accounts may grow larger than an identical taxable account where earnings are taxed every year. For parents or grandparents considering education-funding possibilities, Section 529 state-sponsored College Savings Plans may be something to consider. Investors are urged to consult their personal tax or legal advisors to understand the tax and related consequences of any actions or investments described herein.

Dividends and realized capital gains are not taxed annually and continue to grow within the account. Additionally, when the money withdrawn is used to pay for qualified education expenses, including tuition, fees, certain room and board expenses, supplies and equipment, it's free from federal income tax.

Many states offer different solutions so ask your financial advisor to provide information to determine what's sustainable for your unique situation.

When your child is two-years away from college, convert most of the assets into less risky assets such as a stable value fund, money market or FDIC insured certificates of college, depending on where the money is investments are held and how they are titled.

Be smart about saving for college. If you have large unpaid balances on high interest credit cards, make an effort to pay them off. It is unlikely that the interest you would make keeping the money in your savings account would yield anywhere near the interest that you are being charged on your credit card debt.

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